Commodity lovers are rejoicing. Particularly those playing in the oil patch. The once futile search for profits amid decade low oil prices is finally, finally, bearing fruit. It’s been a long time coming to say the least. I know many have been naked put’n and covered call’n for months now just waiting for USO to finally realize it overshot to the downside.

With oil’s sudden awakening I suspect many covered call sellers are now sitting on short ITM calls. I’ve a few thoughts for you folks I’ll share in a bit.

The accompanying chart of crude oil futures reveals a classic double bottom confirmed by this week’s rally. As of Thursday’s close crude oil had rallied a scorching 45% off last month’s lows. That’s a ridiculous gain in such a short period of time, but, such is common when the rubber band has been stretched to its breaking point.

I’d be remiss if I didn’t bring your attention again to the inescapable truth that USO is a flawed proxy for crude oil. If you had the ultimate pleasure of reading my newsletter from last July – Crude, Contango, and Drag, Oh My! – now is as good a time as any to read it again. If the oil crash is indeed over the pernicious effects of contango are about to be on full display in USO. Matter of fact, the oh-so-popular United States Oil Fund is already showing its weak-sauce ways. Take a gander at the following chart overlay of Crude Futures (candlesticks) and USO (area chart).

Though USO moved tit for tat with oil during its deathly descent, the two are beginning to separate. Blame it on the contango curse. Compared to oil’s 45% pole vault, USO is up a mere 30%. Impressive, yes, but that’s still significant underperformance. Sadly, USO’s inability to match oil’s performance on the upside is a feature, not a bug. Get used to it.

And what of those with short calls that have moved ITM this month? Once the time value has bled out, roll them to the next month. And don’t feel bad for having limited your upside. That’s bound to happen a time or two with covered calls. There’s no way to avoid it and it’s a fair trade for the premium and protection you’ve been scoring along the way.

For my part, I was short the March 10.50 put as well as a March 9.50 call (sold earlier to hedge my ailing naked put plays – for more insight check out Invert Those Strangles, Baby!). With USO launching north of $9.50 my position started to become too neutral so I simply tacked on a few short April puts to tilt the delta back to positive. Once the time value scrams from my short March positions I’ll bail and probably return to straight short puts for April.

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